HMRC updates Gift Aid guidance – and how your charity can benefit

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Chartered Accountants & Tax Advisers

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Some charities have had problems with the Retail Gift Aid process. In response, the taxman has updated its guidance on how the scheme applies to the donation of physical items. We’ve put together this brief introduction to the rules on what donations you can reclaim tax on and how to do so.

No Gift Aid without a Retail Gift Aid scheme

Previously, all charities had the option to claim Gift Aid on behalf of individuals on the sale of goods they donated. They could also do so on the sale of donated items on the internet or at a public auction. However, after a number of calls to the charity helpline querying how the Retail Gift Aid process applies, HMRC has chosen to amend its guidance.

It now notes that only by operating a Retail Gift Aid scheme can a charity claim Gift Aid on the sale of items donated on behalf of individuals. Charities are also permitted to sell items donated to them via a public auction or an online auction website, to maximise the amount raised – but Gift Aid does not apply to these sales.

Applying Gift Aid rules on physical items

Money raised by selling donated goods doesn’t directly qualify for Gift Aid. However, by following the right procedure, HMRC explains that you can ensure the sale of physical items are supplemented with a Gift Aid donation.

Firstly, you are required to explain to the owner of the donated items that the charity will act as their ‘agent’ to sell goods on their behalf if they agree to give the sale proceeds to the charity as a Gift Aid donation. The owner has the right to keep all of the proceeds from the sale of their goods, should they wish. Alternatively, they can choose to donate all or part of the amount.

Once an amount has been agreed, the items have been sold and commission and VAT has been deducted, your charity is permitted to claim Gift Aid on the final amount. Remember, if you operate a charity shop, these arrangements must be explained to each donor before they sign anything and agree to appoint you as their agent.

Three methods of operating Retail Gift Aid

There are three methods by which you can operate Retail Gift Aid:

  • The standard method, partly described above, requires your charity to write or email the donor to advise them of the net sale proceeds following the sale of each item. You must explain that you intend to treat this amount as a gift to the charity unless they contact you within 21 days to say otherwise.
  • Method A allows you to wait until the end of the tax year and send one letter or email detailing the total amount raised. This will apply to your charity if it directly operates its own shops. Under this method, it isn’t necessary to contact the donor if the value of goods sold is less than £100.
    This is because your agreement will stipulate that the net sale proceeds will automatically be treated as a donation. If the sum exceeds £100, you must contact the donor to find out whether they will also donate the sum – or part of the sum – exceeding £100.
  • Method B is very similar, although it applies to your charity if Retail Gift Aid is managed by a subsidiary trading company of the charity. This method is only legitimate where the trading company receives the items and sells them on behalf of the individual, before transferring the donated proceeds to your charity.

    In this instance, the maximum net sale proceeds that individuals can be committed to donate the full amount on is £1,000. However, you can offer a lower amount if individuals consider this sum to be too high.

Expert financial advice for your charity

Operating Gift Aid is an effective way to help maximise your fundraising efforts, but you’ll want to make sure your charity is running just as efficiently in every other area of operation. Our charity specialists have a wealth of experience and currently work with around 80 UK charities of all sizes in a variety of sectors. To find out more about what our finance and accountancy team can do for your charity, get in touch now.